Sunday, February 21, 2010

MTU-The Big Picture (U.S. Stocks), updated June 2011

In terms of the big picture, I have been thinking about the following three key questions for some time. I’ll attempt to outline my thoughts below.

It has been and will be a work in progress for the foreseeable future. As I continue to reflect on these items and as additional developments in key areas surface, I will give revisions and updates in this post.

So please come back to this post for updates from time to time.

June 2011 entry

The Feb 2010 entry highlighted the most probable long term bullish or bearish wave counts for U.S. stocks. Based on market developments over the past 16 months, the current entry
(1) adds a more bullish wave count (inspired by tglacour) as at least a competing scenario to the bullish count highlighted in the Feb 2010 entry,
(2) makes adjustment to the bearish count.

Summary of the Feb 2010 entry (see below)
The Feb 2010 entry highlighted the most probable long term bullish or bearish wave counts for U.S. stocks (see this chart).

Based on the bullish count, primary wave [5]-up of cycle wave V-up of supercycle wave (V) of grand supercycle wave [III] has been in progress since the 2009 low.

Based on the bearish count, grand supercycle wave [III] ended at the 2000 high and a grand supercycle wave [IV] correction is in progress. At that moment, it appears that primary wave [2]-up of cycle wave c-down of supercycle wave (a) of grand supercycle wave [IV] has been in progress since the 2009 low.

What has happened over the past 16 months?
[1] 6 of the 11 broad market indexes have since exceeded their respective 2007 highs, including the equal-weighted SP500 index (Chart 1).

[2] Among major SP500 sectors, consumer staples, health care, consumer discretionary and retail sectors have also exceeded their respective 2007 highs, with energy, material and industrial sectors not far behind (see Were it not for financials … (1/21/11)).

[3] In Europe, $DAX and $FTSE100 have already retraced 87.92% and 80.31% of their respective 2007-2009 decline.

An addition to the top bullish count
Chart 2 presents an addition to the top bullish count, inspired by tglacour’s comments in the comments section. While the primary count in Chart 2 differs from what I gather is tglacour’s count (see the alternative count), the main message is the same.

Based on this count, cycle wave V-up of supercycle wave (V) of grand supercycle wave [III] has been in progress since the 2009 low. As a result, the 2009 low is one wave degree higher relative to the previous top bullish count.

The key merits of this count are
(1) it channels better at multiple wave degrees,
(2) the 2009 low rests right on the boundary of the base channel.

Adjustment to the top bearish count
Given new market developments (i.e. new all time highs and deep retrace highlighted in Chart 1), we must downgrade (but not eliminate) the likelihood of the rally since the 2009 low being primary wave [2]-up of cycle wave c-down.

Instead, a cycle wave b-up (or x-up) or supercycle wave (b)-up (or (x)-up) appears far more likely within the bearish interpretation. Please also see discussions in A Potential x Wave (2/4/11) Chart 3 presents the adjusted count.

February 2010 entry

Q: Is the U.S. stock market in the vicinity of a grand super cycle (GSC) top or just a super cycle (SC) top?

Bottom line - The U.S. stock market is more likely near a GSC top than just an SC top.

Timing - The GSC top may have already occurred (i.e. 2000 or 2007) or may surface within the next 5 to 10 years. For the 2007 peak to be the GSC top, it is necessary to assume a truncated wave [5] (of primary degree) in smaller cap indices. Thus, it is the least likely scenario (of the three).

Alt – There has been discussions among Elliott wavers about the possibility that the 1929 peak was a GSC top and thus the next GSC top should be 100-200 years away. This description is inferior to the primary count for two main reasons. First, Mr. Prechter (at EWI) has offered a count which (better) accommodates price actions in the early 1700s (at a GSC degree). Second, a 3-year retrace of a 200+ year advance is just too brief.

Q: Which is THE most probable long term bullish or bearish wave count?
Thoughts: See chart. I have highlighted targets for the bullish as well as the bearish wave counts on the chart.

Q: Which one of the bullish and bearish scenarios is MORE probable?

This remains an open question as of 2/19/10 close.

Observations supporting the bearish count
[1] The broader macro and sentiment picture support a major correction (of a GSC degree).
[2] A major correction maps well into the pattern of economic cycles over the past four hundred years, from the perspective of Kondratieff cycles.
[3] Speculative bubbles typically precede the major correction within every Kondratieff cycle.
[4] SC wave (V) channels well, with the top at 2000. See the solid red channel lines.
[5] Decent Fibonacci relationship among waves. With the nominal peak in 2007, V=I-III within SC wave (V). With the orthodox peak in 2000, V=1.50 I-IV within SC wave (V).

Observations supporting the bullish count
[1] Macroeconomic numbers and corporate profitability have been stabilizing and improving since 2009Q1.
[2] Fiscal and monetary policies worldwide remain very accommodative. The resulting moral hazard is conducive to speculative behavior.
[3] Stock prices have been trending up since 2009Q1, and the retracement of the prior decline has been deep, especially in small cap indices.
[4] The level where the broader stock market had bottomed in 2009Q1 is indicative of a fourth wave ([4] of V(V) in this case). See the dashed green channel lines.

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